🇧🇷 Brazil risk report

Corruption represents a severe constraint to business in Brazil. Brazil is currently being roiled by a number of large corruption cases including the ‘Operation Car Wash’ case involving Petrobras and Odebrecht in elaborate kickback and bribing schemes that have embroiled hundreds of politicians and led to the impeachment of former president Dilma Rousseff. Corruption is especially likely in the tax administration, public procurement, and natural resource sectors. The Clean Companies Act is one of the toughest anti-corruption laws in the world, but its enforcement is inconsistent. Under the Act, bid-rigging and fraud in public procurement, direct and indirect acts of bribery, and attempted bribery of Brazilian public officials and of foreign public officials is illegal. The Act holds companies liable for the corrupt acts of their employees. Brazilian law makes no distinction between bribes and facilitation payments. Giving gifts is illegal and uncommon when doing business and establishing relationships. Businesses are advised to consider the Portal's compliance guide for Brazil’s Clean Company Act.

Clean Companies Act Summary
Compliance Guide

Judicial system Very high risk

Companies face a high risk of corruption in Brazil's judicial system. The judiciary in Brazil is formally largely independent, but is hampered by corruption and limited capacity (BTI 2016). Companies operating in Brazil are most likely to encounter corruption at local levels of the judiciary, where local political and economic interests have a heavy influence (BTI 2016). Corruption is a problem in this sector as judges are susceptible to bribery (BTI 2016). The Brazilian judiciary is heavily overburdened and bureaucratic, leading to lengthy processes and a backlog of unheard cases (HRR 2016). Contract disputes in Brazil can be similarly lengthy and complex (ICS 2016). Companies perceive the judiciary as insufficiently independent and the regulatory system to settle disputes and challenge regulations is considered inefficient (GCR 2016-2017). The time required to enforce a contract in Brazil is slightly below the regional average (DB 2017).

Brazil is a signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, but it is not a member state to the International Centre for the Settlement of Investment Disputes (ICSID).

Police Very high risk

Companies should note the risk of corruption and external influence in Brazil's police sector. The police force is entrenched in corruption, violence, and acts with impunity (BTI 2016; FitW 2016). Powerful landlords in remote or rural areas of the country have significant influence over the police (BTI 2016). Companies do not find the police reliable and attribute significant costs to mitigate crime and violence (GCR 2016-2017).

Prominent federal police officer Newton Ishii, a key investigator in the probe into corruption at the state-owned company Petrobras, was arrested on corruption charges himself in June 2016 relating to earlier convictions for participating in a smuggling ring (Reuters, Jun. 2016).

Public services Moderate risk

Inefficient and excessive bureaucracy, as well as bribery, are moderate risks for companies when acquiring public services in Brazil (GCR 2016-2017). Most civil servants are hired according to professional criteria, but in other areas positions of responsibility are filled by political appointees (BTI 2016). Both for foreign and domestic businesses, regulations require considerable documentation and bureaucracy in day-to-day operations (BTI 2016). Starting a business in Brazil is less costly than elsewhere in Latin America but takes more time, with 102 days in Sao Paolo and 45 days in Rio de Janeiro (DB 2017). Getting electricity takes 62 days, which is slightly faster than the regional average (DB 2017).

Land administration High risk

Companies may encounter moderate to high corruption risks in Brazil's land administration; there is a particularly high risk of undue influence in the land administration in some rural areas of Brazil. In these areas, powerful landlords have a strong influence on the local judiciary and police forces (BTI 2016; HRR 2016). American investigation giant TIAA-CREF has been accused of forging large-scale land grabs with the aid of land speculators accused of employing gunmen to snatch land from farmers by force (NYT, Nov. 2015). TIAA-CREF denied the allegations and claimed that it conducts research and due diligence to verify the legality of the assets before purchase, yet land registries are reportedly woefully unreliable in Brazil (WYNC, Jan. 2016). Despite this, property rights are well protected: Foreigners can purchase land and property, and expropriations are uncommon (BTI 2016, ICS 2016).

Registering property takes 25 days, which is less than half the time of the Latin American average (DB 2017). Brazil requires the company to go through double the administrative steps compared to the regional average (DB 2017).

Tax administration Very high risk

There is a high risk of corruption in Brazil's complex tax administration. Companies report that bribes in the tax administration happen frequently (GCR 2015-2016). Companies identify tax rates to be the biggest obstacle to doing business in Brazil (GCR 2016-2017). In what is considered one of the most onerous and complex tax systems in the world, opportunities for corruption and bribery are plentiful (WSJ, Apr. 2015). Companies have been tempted to engage in tax evading activities because of the enormous complexity and burden the tax system imposes on them (Financial Times, June 2016). Tax regulations do not differentiate between foreign and domestic firms, but companies should be aware that the tax system is set up to provide advantages to domestically-produced products, sheltering them from imported products (BTI 2016).

Prosecutors are continuing to investigate 'Operation Zelotes', a scheme that allegedly ran for decades in which over seventy Brazilian companies, banks, and multinationals participated in a scheme where they bribed officials to reduce or waive tax payment fees (Financial Times, June 2016). The total sum of missing payments is said to amount to at least USD 5.5 billion (Financial Times, June 2016). Brazil's tax court system was overhauled leading to the court ruling in favor of the tax authorities in many cases (International Tax Review, Dec. 2016). Former Finance Minister Guido Mantega is currently standing trial over charges that he solicited an illegal political campaign donation of USD 16 million from engineering firm Odebrecht in return for favorable tax legislation (Reuters, Apr. 2017).

Even though there is a comparatively low frequency of tax payments, companies have to spend over 2000 hours per year on preparing, filing and paying taxes compared to 163 hours in OECD states, and 343 hours in Latin America (DB 2017).

Customs administration Very high risk

There is a significant risk of corruption at the Brazilian borders when importing and exporting (GETR 2016). Companies assess the border administration to be inefficient, features poor time-predictability, and prone to irregular payments and requests for bribes (GETR 2016). Burdensome import procedures and corruption are frequently cited by companies among the most problematic factors for importing (GETR 2016). Particularly documentary compliance with import procedures takes businesses a lot longer than the regional average (DB 2017).

The Brazilian port of Santos has been named as the main departure point of cocaine smuggling bound for Asian, European, and African markets, yet only seven percent of South America's cocaine seizures take place there (Insight Crime, July 2016). It has been reported that corruption is commonplace among officials at the facility (Insight Crime, July 2016).

Public procurement Very high risk

Companies are highly likely to encounter favoritism and corruption in Brazil's public procurement. Companies indicate that irregular payments and bribes are highly common in procurement procedures in Brazil (GCR 2015-2016). Companies assess that public funds are frequently diverted and that government officials frequently show favoritism to well-connected firms and individuals when deciding upon policies and contracts (GCR 2016-2017). Foreign companies may find it difficult to participate in public procurement without significant in-country presence, as a local representative is commonly required (ICS 2016). Foreign companies often have success in sub-contracting from local firms that have won government contracts (ICS 2016).

Amidst the widening Petrobras corruption case, also known as 'Operation Car Wash', several firms and politicians are implicated in a corrupt cartel-forming kickback system of bidding and awarding contracts (COHA, Apr. 2016). The investigation led to the impeachment of President Rousseff as well as other high-ranking officials (The Guardian, Feb 2017). The federal police are continuing to investigate numerous foreign firms who paid bribes to obtain contracts with Petrobras, including South Korea's Samsung Heavy Industries Co Ltd, Swedish builder Skanska AB, Danish oil and shipping group Maersk, and British engineering firm Rolls-Royce Holdings (Reuters, June 2015). The damages to Petrobras alone are reportedly as much as USD 5.3 billion (Vox, Mar. 2016).

A separate but related corruption case involves Latin America's largest construction firms, Odebrecht (The Guardian, Feb. 2017). Testimony by former and current Odebrecht executives shows that the company operated a "bribery department" which meticulously funneled over USD 800 million in bribes to various parties in Latin America (The Guardian, Feb. 2017). Six out of twelve stadiums built for the 2014 World Cup are currently probed for corruption and bribery, in addition to the subway line opened for the 2016 Olympics (The Guardian, Apr. 2017). Several high profile officials involved in the organization of the 2016 Olympics are also under investigation in connection to the scheme, including former Rio mayor Eduardo Paes and the president of the accountability tribunal for the state of Rio (The Guardian, Apr. 2017). Furthermore, several executives have received sentences of up to twenty years in jail, but some have been suspended contingent on further cooperation with the investigation (Law360, Mar. 2016). Odebrecht and associated petrochemical company Braskem agreed to pay at least USD 3.5 billion to authorities in the U.S., Brazil, and Switzerland, in the largest fine recorded in a foreign bribery case thus far (Reuters, Dec. 2016).

A scheme of bribery of public health officials by officials in Brazil's USD 12 billion meat-exporting industry has recently been uncovered (Reuters, Mar. 2017). The probe found evidence of bribes paid to health officials and politicians to overlook practices including shipping products with traces of salmonella and processing rotten meat (Reuters, Mar. 2017). It has since been revealed that JBS, a major meat processing firm, had made financial contributions to over a hundred deputies and 28 senators in addition to paying large bribes to others; over 30 percent of Brazil's elected deputies and senators are involved, with the crisis threatening to bring down President Temer's government (Financial Times, May 2017). It is alleged that one USD 153,000 bribe was destined for Brazil's president, Michael Temer (Financial Times, May 2017). JBS has agreed to pay a fine of USD 3,2 billion in a leniency agreement over the bribery charges (FCPA Blog, May 2017).

Companies are recommended to implement special due diligence procedures to counter the likelihood of encountering corruption in the procurement process.

Natural resources High risk

Companies should be aware of illegal trade and corruption present in Brazil's natural resources sectors. Brazil has relatively solid resource governance; particularly safeguards and quality controls are excellent, but Brazil's 'enabling environment' score remains low (NRGI 2017). The Brazilian police are investigating allegations that a senior mining and Energy Ministry Official in collusion with other public officials and law firms, have been duping mining firms into paying excess royalties totaling USD 475 million (Reuters, Dec. 2016). The investigation, dubbed "Operation Timóteo", has thus far involved over a dozen searches leading to seizures of USD 21 million in assets (Reuters, Dec. 2016).

Illegal logging and timber trade is another strain on Brazil's natural resource governance. In a "wood laundering" process, companies use fraudulent paperwork to bring illegal wood from protected or otherwise critical areas of the Amazon to be processed and exported (Greenpeace, June 2015). The rate of deforestation has been increasing again in recent years, which critics allege is due to the low priority the government of former President Roussef had accorded to the environment in combination with the alliances her government had built with powerful agribusiness groups (BTI 2016).

Legislation

The anti-corruption legal framework in Brazil is solid but lacks consistent enforcement (ICS 2016). Corruption is addressed in the Penal Code and in specific federal laws. The Penal Code contains provisions establishing penalties for misconduct, such as embezzlement of public funds, extortion, public graft, breach of public duty, passive and active bribery, bribery in international business transactions, and violation of confidentiality of an offer tendered in competitive bidding. Brazil's Administrative Improbity Law requires all public officials to submit asset declarations every year. The Brazilian Clean Company Act holds companies responsible for the corrupt acts of their employees, meaning a company can be liable without a finding of fault. Corrupt practices include financing or subsidizing the performance of a prohibited act, bid rigging, fraud in public procurement, and direct or indirect acts of bribery and attempted bribery of Brazilian public or foreign public officials. The act provides strict civil and administrative penalties, such as fines of up to 20 percent of the annual corporate turnover, barring from public grants or from carrying out economic activities (CMS 2016). Companies are recommended to read the portal's compliance guide for the Clean Company Act. The Penal Code establishes domestic criminal offenses with penalties of up to 12 years imprisonment for individuals (CMS 2016). The Conflict of Interests Law regulates conflict of interest and trading in influence for federal employees. Judgments are now enforceable following a second appeal, which has encouraged sentenced individuals to bargain for plea deals and disclose corruption (Lexology, Mar. 2017). Whistleblower protection is minimal as it goes little beyond the standard protection of witnesses in criminal cases (TI 2016). Brazil is a signatory to the OECD Anti-Bribery Convention and the United Nations Convention Against Corruption (UNCAC).

Civil society

Brazil has a vibrant democracy with strong constitutionally guaranteed civil rights allowing the press to vigorously report on government performance and controversies (BTI 2016). Violence against journalists, particularly those investigating corruption, and judicial censorship do compromise these guarantees in practice (BTI 2016); impunity for crimes against journalists is high, but progress has been made in the prosecution of murders against journalists (FotP 2016). Media ownership is highly concentrated and is often biased to the interests of their owners (BTI 2016). A local newspaper in the state of Parana, published in 2016 a list of judges, prosecutors, and civil servants earning more than the legal maximum salary (HRR 2016), leading to 37 lawsuits against the newspaper initiated by judges and public prosecutors (HRR 2016). The NGO Committee to Protect Journalists denounced these suits as 'judicial harassment (HRR 2016). The press is rated as "partly free" (FotP 2016).

Freedoms of association and assembly are generally respected and NGOs are able to do their work (FitW 2016). Civil society is increasingly organizing and influential in Brazil; groups also have a significant influence on the implementation of public policy (BTI 2016). Nationwide protests against political corruption following the Petrobras bribery scandal have taken place in a largely peaceful manner (FitW 2016).

Sources

• World Bank: Doing Business 2017.
• Natural Resource Governance Institute: Brazil Country Page 2017.
• FCPA Blog: "Brazil Meatpacker Agrees To Pay USD 3,2 Billion To Settle Graft Probe", 31 May 2017.
• Financial Times: "culture of Corruption Engulfs Brazilian Elite", 26 May 2017.
• The Guardian: "Stadium Deals, Corruption and Bribery: Olympic and World Cup 'Miracle'", 23 April 2017.
• Lexology: "Corruption Legislation in Brazil and Multinational Companies", 30 March 2017.
• Reuters: "Brazil Court Delays Ruling in Case That Could Unseat President Temer", 4 April 2017.
• Reuters: "Brazil Meat Probe Will Show Further Evidence of Graft", 25 March 2017.
• The Guardian: "Brazil's Corruption Scandal Spreads Across South America", 11 February 2017.
• Bertelsmann Foundation: Transformation Index 2016.
• CMS: CMS Guide to Anti-Bribery and Corruption Laws - Brazil 2016.
• World Economic Forum: Global Competitiveness Report 2016-2017.
• World Economic Forum: Global Enabling Trade Report 2016.
• Freedom House: Freedom in the World 2016.
• Freedom House: Freedom of the Press 2016.
• Transparency International: Brazil: Overview of Corruption and Anti-Corruption 2016.
• US Department of State: Investment Climate Statement 2016.
• US Department of State: Human Rights Practices Report 2016.
• World Economic Forum: Global Competitiveness Report 2015-2016.
• Reuters: "Brazilian Firms to Pay Record USD 3.5 Billion Penalty in Corruption Case", 21 December 2016.
• Reuters: "Brazil Police to Question Prominent Pastor in Mining Graft Probe", 16 December 2016.
• International Tax Review: "Global Tax 50 2016: Operation Zealots", 6 December 2016.
• Insight Crime: "Report Spotlights Drug Traffic at Santos Port, Brazil's Drug Policies", 20 July 2016.
• Financial Times: "Prosecutors Tackle Brazil's 'Other' Corruption Probe", 22 June 2016.
• COHA: "Understanding the Petrobas Scandal", 7 April 2016.
• Law360: "Odebrecht Ex-CEO, Others Sentenced Over Petrobras Scheme", 8 March 2016.
• New York Times: "TIAA-CREF, U.S. Investment Giant, Accused of Land Grabs in Brazil", 16 November 2015.
• Reuters: "Brazil Police Officer, Symbol of Corruption Crackdown, Arrested", 8 June 2016.
• Vox: "Brazil's Petrobras Scandal, Explained", 18 March 2016.
• WNYC: "TIAA-CREF Responds to Allegations of Brazilian Land Grabbing", 18 January, 2016.
• Reuters: "Foreign firms bribing Petrobras were left out of cartel -police", 24 June 2015.
• Greenpeace: "How loggers are destroying the Amazon — and getting away with it", 9 June 2015.
• Reuters: "Former Petrobras exec details corruption scheme in hearing", 10 March 2015.